THE REDUCTION of the eurozone’s base interest rate to 1.5 per cent creates new conditions for Cyprus’ credit system, Finance Minister Charilaos Stavrakis said yesterday.
Stavrakis emphasised the fact that the decision by the European Central Bank (ECB) to lower its benchmark rate should trigger equivalent reductions in lending rates by banks in Cyprus, since 30 per cent of loans are linked to the ECB’s base rate.
Speaking to CyBC, Stavrakis expressed the hope that by the end of the year, deposit rates should come down to around 2 per cent, and lending rates for most categories of bank customers down to around 4.0 per cent.
Last Tuesday, the Finance Minister said that deposit rates had already come down by as much as 3.0 per cent and that it was time lending rates followed suit. He said commercial banks had already reduced deposit rates from 7.0 per cent and 7.5 per cent to 4.0 per cent and 5.0 per cent. “What we haven’t noted is a similar reduction in lending rates,” Stavrakis said.
The banks are arguing that their real cost of funds still prevents them from passing on the benefit of the ECB rate reduction to their customers, especially due to the differential between their deposit rates and lending rates.
A senior official at a major Cypriot bank said yesterday that the rate on loans taken out prior to 1 January 2008 could be reduced if they are directly linked to the ECB base rate.
But, he added, as long as deposit rates are being kept attractively high by the new market players – Eurobank and Piraeus Bank, who want to build up their customer base – and established players like the Co-op Bank – with over 30 percent of the deposit market – then the other banks cannot afford not to follow suit, for basic commercial reasons.
This may make sense to the banks, but it is still hard to swallow for borrowers who are expected to keep paying for the banks’ strategy.
The Cyprus Mail is aware of at least one borrower with a variable loan linked directly to the ECB base rate, who saw the margin on his loan raised unilaterally by his lender in February from 1.75 per cent to 2.75 per cent, despite – or probably thanks to – the ECB rate cut at that time.
Regarding the banks’ view on the prospects for a lending rate cut, “the only source of liquidity today is the ECB, and this requires security in the form of government bonds or guarantees”, the senior official said.
In light of this, the government’s planned €1 billion foreign bond issue may be crucial for reducing lending rates sooner rather than later.
The government announced recently that it intends to issue the foreign bond “in the first half of 2009”, aimed primarily at foreign investors but also available to local banks. If successful, this could be a major source of liquidity for the banking market, which should improve the chances of the lending rates coming down. “If the foreign bond issue happens as planned, we will be happy to participate,” the senior official said.
